The current issue and full text archive of this journal is available at www.emeraldinsight.com/0263-5577.

htm

Effects of nancial reform on productivity change

Li-Hua Huang, Hsing-Chin Hsiao and Mei-Ai Cheng
Department of Accounting Information, National Taipei College of Business, Taipei, Taiwan, Republic of China, and

Effects of nancial reform on productivity 867

Received 25 March 2008 Revised 29 April 2008 Accepted 29 May 2008

Shyr-Juh Chang
Department of Accounting Information, Chihlee Institute of Technology, Banciao City, Taiwan, Republic of China
Abstract
Purpose The aim is to investigate the effects of the rst nancial restructuring (FFR) on productivity growth, technical progress and efciency change, using data from 42 commercial banks in Taiwan from 2001 to 2004. Design/methodology/approach Data envelopment analysis is applied to compute the Malmquist index of productivity change. Findings It is found that Taiwan commercial banks on average experienced a 117.39 percent increase in productivity growth, of which is 2.11 percent is due to efciency change and 115.28 percent to technical progress over the four year period. In addition, during the four year period, a 1 percent reduction in the nonperforming loan ratio resulted in 1.85 percent growth in productivity; a 1 percent increase in the capital adequacy ratio led to 2.15 percent growth in productivity. Practical implications It can be concluded that after the FFR, the productivity growth, technical progress, and efciency change all improve, with the lower nonperforming loan ratio contributing to this improved performance. Originality/value The study provides evidence of the productivity change of the banking industry in Taiwan in response to the FFR. It also contributes additional empirical evidence on the impact of a reform on bank productivity in a developing country. Keywords Data analysis, Financial restructuring, Operational research, Banking Paper type Research paper

Introduction Over the past two decades, the globalization and liberalization of the nancial markets advances in both nancial and non-nancial technologies, and various political and economic events have increased competition among Taiwanese banks (Hammes and Shapiro, 2001; Berger and Mester, 2003) and forced the authorities to deregulate and restructure the domestic banking industry. Before nancial reform, there were several potential nancial crises among banks: peaks in nonperforming loan ratio, loose credit, inferior capital adequacy ratio, over banking due to excessive competition, less protability, and lack of innovation in Taiwan. To overcome a possible nancial crisis and establish a sound banking system, Taiwan regulatory authorities have initiated various reforms and restructuring programs (Konishi and Yasuda, 2004), including the rst nancial restructuring (FFR). The explicit ofcial goal of FFR is to improve the nature of nancial institutions and restructure the nancial market. FFR imposed the nonperforming loan ratio and the

Industrial Management & Data Systems Vol. 108 No. 7, 2008 pp. 867-886 q Emerald Group Publishing Limited 0263-5577 DOI 10.1108/02635570810897973

IMDS 108,7

868

capital adequacy ratio of nancial institutions required to be no more than 5 percent and no less than 8 percent, respectively, within a two year period (2002-2003). Although the productivity is not explicitly ofcial goal of FFR, the banking sector is in highly competitive environment. Facing greater competition, the banks in Taiwan need to be productive to sustain the competitive advantage (Kuo, 2004; Kuo et al., 2007; Hsu et al., 2007; Shih, 2008). Cook et al. (2004) dened the productivity in the banking sector to result in either lower cost or improved prot. Casu et al. (2004) also analyzed the productivity of banking from a policy perspective. If banks are more productive then one might expect better performance, lower prices, and improved service quality for consumers, as well as greater safety and soundness if productivity improvements are channeled towards strengthening capital buffers that absorb risk. Financial liberalizations, reforms or restructuring programs are intended to foster better resource allocation and improve productivity (Berg et al., 1992; Isik and Hassan, 2003; Tortosa-Ausina et al., 2008). While numerous prior studies have investigated the effect of nancial reforms on banking performances, the overall impact of nancial reforms is ambiguous (Angelini and Cetorelli, 2003) and scant studies examine the impact of nancial reforms on bank productivity dynamics in emerging markets (Williams and Nguyen, 2005; Zhou et al., 2007; Chandra and He, 2008). In addition, to our knowledge, no research has examined the impact of the FFR on the banking productivity of commercial banks in Taiwan. In this paper, we address this limitation in the literature by evaluating whether the FFR regulation affected the productivity growth of commercial banks in Taiwan. Specically, we evaluate how the FFR affected the bank productivity change through changes in the nonperforming loan and capital adequacy ratios, the two ofcially imposed performance indicators. We further decompose bank productivity change into technical change and efciency change, the mutually exclusive and exhaustive components (Mukherjee et al., 2001). We examine the relative importance of technical progress (innovation or shock) and efciency change (catching-up or falling behind) among banks (Maniadakis and Thanassoulis, 2004; Reddy, 2005). The data envelopment analysis (DEA), a nonparametric approach, is utilized to evaluate the extent to which productivity change can be explained by a shift in the banking sectors technical progress and a change in the relative efciency. We analyze data from 42 commercials banks in Taiwan for before and after the FFR period (2001-2004). Our study contributes to the literature in at least two ways. First, our study provides evidence of the productivity change of the banking industry in Taiwan in response to the FFR. The ability of banks to allocate funds as efciently as possible to nance productive investment and consumption expenditures is crucial in producing a high and sustainable rate of economic growth. Evaluating how the FFR affects productivity changes in terms of technical change and efciency change will provide insight for bank management seeking to improve operating performance and policymakers considering nancial reforms. Second, our study provides additional empirical evidence on the impact of a reform on bank productivity in Taiwan, a developing country. Casu et al. (2004) claimed that analyzing productivity differences across countries facilitate to identify the success or failure of policy initiatives or, alternatively, may highlight different strategies undertaken by banks. Isik and Hassan (2003) suggest that it is imperative and meaningful to examine the effects of government regulations on bank productivity in

developing countries while Kumbhakar and Sarkar (2003) demonstrate the nancial reform and liberalization policies may be more productive and efcient in developing a sound banking system for industrialized countries. Our study veries this notion of reform impact for developing countries given their unique markets and institutional structures. Literature review and research hypotheses Impact of nancial reform on banking productivity Many studies have examined issues related to the impact of nancial reforms on banking productivity in the past two decades. The results of this research have been mixed. Some studies document a positive reform-productivity relation. For instance, Carter and McNulty (2005) found while most banks tended to be small, less efcient, and have high unit costs prior to deregulation. In the post deregulation environment, some banks became very large, developed economies of scale, and had low unit costs. Halkos and Salamouris (2004) examined the impact on banking efciency of various Greek nancial reforms, including the liberation of interest rate determination, the abolition of various credit rules, the free movement of capital, and the increased competition from banks of the European Union. During the nancial reform period of 1997-1999, a decrease in average efciency level of Greek banks in 1998 was followed by a signicant increase in 1999 to the maximum performance level in the examined period. Similarly, examining 201 US commercial banks, Mukherjee et al. (2001) found that productivity declined in the initial nancial reform period, but exhibited a 4.5 percent productivity growth per year in the post-deregulation period, with banks having large assets experiencing higher productivity growth. In addition, Kumbhakar and Sarkar (2003) analyzed the relationship between deregulation and productivity growth using data from the Indian banking industry over a 12-year period from 1985 to 1996. They found that the productivity growth for public banks was moderate over the entire study period, with a slowdown around 1990 when the deregulation measures were adopted. In addition, they found that the productivity growth for private sector banks was slightly higher than that of public sector banks for the entire study period. In contrast, some research has documented declining productivity due to nancial reforms. For instance, Fukuyama and Weber (2002) investigated the productivity change in Japanese banks during 1992-1996 and found that bank productivity declined an average of 2 percent per year. Similarly and recently, Park and Weber (2006) measured the Korean bank productivity change for the period 1992-2002 and observed that productivity grew primarily due to technological progress which offset the decline in efciency. Impact of FFR on banking productivity In this study, we examine the impact of the FFR on bank productivity change, clarifying bank productivity change into technical change and efciency change in order to examine their relative importance (Maniadakis and Thanassoulis, 2004; Reddy, 2005). Recall that the FFR requires banks to maintain a nonperforming loan ratio of less than 5 percent and a capital adequacy ratio of at least 8 percent by the end of 2003. Banks complying with these requirements enjoy several benets including improved bank efciency through entry deregulation, branch de-licensing, and deregulation of interest

Effects of nancial reform on productivity 869

IMDS 108,7

870

rates. Penalties would be imposed on banks not complying with these requirements. For instance, by the end of 2003, if the nonperforming loan ratio was over 5 percent, the addition of new domestic and international branches would be prohibited, as well as applications for converting a general branch to a combo branch. If the ratio is over 15 percent, the banks would be required to simplify their branches, which would decrease their market share, increase operating costs, and lower operating prot. Given these incentives, banks strive to comply with the requirements of the FFR. According to Berger and DeYoung (1997), in order to reduce the nonperforming loan ratio, banks incur more costs associated with performing additional operating activities including: . additional monitoring of outstanding accounts receivable, delinquent borrowers, and the value of their collateral; . analyzing and negotiating possible workout arrangements; . seizing, maintaining, and eventually disposing of collateral; . defending the banks safety and soundness record to bank supervisors and market participants; . taking additional precautions to preserve the high quality of loans; . writing-off nonperforming loans to bad debt expense; and . managing nancial risk. The increase in operating expenses from reducing bad debt will offset revenues and negatively impact banking operating productivity. We expect that the substantial operating expenses will deteriorate the efciency growth in FFR period. However, in the post-reform period (2004), we argue that with the reduction of bad debts resulting from compliance with the nonperforming loan requirement of the FFR, the banks asset quality will improve and nancial risk will decrease. Thus, we hypothesize that bank operating efciency will ultimately improve in the post-reform period compared to pre- and reform periods. The incentives from the FFR and investment in technology stimulated by market competition may trigger better banking performance. Adoption of new technology, such as electronic payment systems, ATM networks, and internet banking, allow banks to further reduce unit costs. Particularly larger banks are better able to afford new technology. Thus, operating costs should be lower in the long run. Generally speaking, the unit cost of a transaction by a bank teller is $1.2 US dollars, in contrast to an ATM one for $0.3 US dollars. Given lower costs associated with technological progress, banks are inclined to update and invest in technological facilities, thereby lowering operating efciency with the increased operating costs. However, productivity may grow ultimately because the benet from technology progress may outweigh the decrease in the efciency from increased operating costs. Therefore, we have thus the following three main hypotheses: H1A. Commercial banks experienced technical progress in the post reform period (2004) compared to the pre-reform period of the FFR (2001). H1B. Commercial banks experienced relative efciency progress in the post reform period (2004) compared to the pre-reform period of the FFR (2001).

H1C. Commercial banks experienced productivity growth in the post reform period (2004) compared to the pre-reform period of the FFR (2001). Nonperforming loan and banking productivity Performance evaluation and benchmarking have become important continuous assessment and improvement tools for banks (Cook et al., 2004). The US Governments Federal Deposit Insurance Corporation (FDIC) developed a bank rating and monitoring system in the early 1970s which is referred to as the CAMELS (Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity) (Kao and Liu, 2004). Among the various performance indicators identied by CAMELS, the nonperforming loan and capital adequacy ratios are two imperative factors relevant to banking performance. According to the FFR, once the nonperforming loan ratio is below 5 percent, the related ofcial application process and routine verications can be simplied and nancial innovation. Thus, lower nonperforming loan ratio is encouraged. In addition, if the nonperforming loan ratio is under 2.5 percent, combo branch ofce applications along with the permits to open either domestic or foreign branch ofces are doubled. The rationale for the focus on nonperforming loans of the FFR is consistent with the notion that high nonperforming loans represent weakness in balance sheet conditions, poor quality of loan assets, and fragility of the banks. Prior research provides support for this rationale by documenting a positive relation between nonperforming loans and poor performance. For instance, Das and Ghosh (2006) found that increases in nonperforming loans tend to be followed by decreases in measured efciency, suggesting that high levels of sticky loans cause banks to increase spending on monitoring, administering and/or selling off these loans, and possibly become more diligent in administering the performing portion of their existing loan portfolio. Similarly, Altunbas et al. (2000) suggested that nonperforming loans are positively related to bank inefciency and Berger and DeYoung (1997) indicated that prior to failure, failing banks have large proportions of nonperforming loans. Applying the Malmquist productivity index for the period 1996-2001, Das (2002) found that higher loans lead to lower productivity. Berger and Mester (2003) indicated that lower nonperforming loans improve productivity over time by reducing the costs associated with managing problem loans. Recall that the FFR required a 5 percent ceiling for nonperforming loan ratios. To meet this requirement, bad debts must be written off and the aging of accounts receivables must be veried. As a result, substantial operating expenses are expected to be incurred, deteriorating the efciency growth in the FFR period. However, in the post-reform period (2004), we argue that with the reduction of bad debts resulting from compliance with the nonperforming loan requirement of the FFR, the banks asset quality will improve and nancial risk will decrease. In addition, as discussed above, prior research has documented a negative relation between the nonperforming loan ratio and operating efciency. We hypothesize that bank operating efciency will ultimately improve in the post-reform period compared to the reform period. The incentives from the FFR and the investment in technology may trigger better banking performance. Therefore, the synergy of technical progress and operating efciency would lead to positive productivity growth. Thus, we have the following three hypotheses:

Effects of nancial reform on productivity 871

IMDS 108,7

H2A. Bank technical progress is negatively associated with the nonperforming loan ratio change from 2001 to 2004 period. H2B. Bank relative efciency change is negatively associated with the nonperforming loan ratio change from 2001 to 2004 period.

872

H2C. Bank productivity growth is negatively associated with the nonperforming loan ratio change from 2001 to 2004 period. Capital adequacy and banking productivity Regulators have increased their focus on the capital adequacy of banking institutions to enhance the stability of the nancial system (Rime, 2001). Recall that the FFR requires a minimum capital adequacy ratio of 8 percent. This requirement serves to buffer against losses (Barth et al., 2004), to reduce bank insolvency risk (Blum and Hellwig, 1995), and to alter banks incentives to manage capital and earnings. It also constructs strategies in response to competition (Ahmed et al., 1999). In this way, bank productivity is somewhat attributable to capital adequacy. Failure to comply with this requirement may cause the government to impose costly restrictions such as disallowing the establishment of a new branch, merger, project, or change in ownership or control; requiring higher minimum capital requirements than required of other banks; and requiring changes to nancial statement data. In this way, the productivity of banks with lower capital adequacy suffers. Consistent with this reasoning, Das and Ghosh (2006) suggest that the capital adequacy is positively related to efciency, perhaps reecting the fact that well-capitalized banks are perceived to be relatively safe, thus lowering the cost of borrowing and thereby enhancing efciency. Well-capitalized banks are also expected to have better credit risk management practices and thus able to contain their loan loss provisioning. Emphasis on nancial soundness as evidenced by the achievement of benchmark capital adequacy leads to changes in the internal functioning of banks, especially in the systems of credit evaluation, risk assessment and management, and corporate governance such uncertainties and systemic risk are reduced, contributing to enhanced efciency. In addition, more protable (and lower inefciency) banks are usually preferred by clients and therefore attract the biggest share of deposits as well as the best potential creditworthy borrowers. Consistent with the positive relation between productivity and capital adequacy, prior research provides evidence that operating costs are higher for banks with substandard or marginal capital adequacy ratios (Niswander and Swanson, 2000) and banks with higher capital adequacy had higher productivity (Das, 2002). Based on the above discussion, we expect that a higher capital adequacy ratio in response to the FFR will enhance efciency growth. In addition, benets from the government and investment in technology may subsequently trigger better banking performance. Thus, we have the following three hypotheses: H3A. Bank technical progress is positively associated with a higher capital adequacy ratio change from 2001 to 2004 period. H3B. Bank relative efciency change is positively associated with a higher capital adequacy ratio change from 2001 to 2004 period.

H3C. Bank productivity growth is positively associated with a higher capital adequacy ratio change from 2001 to 2004 period. Research design Data and sample The sample of commercial banks that is included in this study is derived from the Taiwan Economic Journal (TEJ) database, the Central Bank of Taiwan, the Financial Supervisory Commission, and related resources. We began with an original sample of 52 banks but eliminated four due to exceptional business types, and six due to incomplete data. Our nal sample consists of 42 Taiwan commercials banks. The research period was from 2001 to 2004, one-year before and after the FFR program which is during the 2002-2003. Measurement of productivity change According to Casu et al. (2004), the Malmquist index is the most commonly used measure of productivity change. We adopted a modied version of the Malmquist (1953) index, which uses multiple outputs and inputs, to measure productivity change (Banker et al., 2005). The Malmquist productivity index allows us to measure changes in total output relative to inputs and compare the base period denoted by 0 with the subsequent period denoted by 1. Let the technology set for period i be dened by production possibility set P i { y; xjy can be produced from x at time i}, i 0,1, where x and y be the observed input and output vectors. Assume that the production set P i, t 0,1 is monotonically increasing and convex, the inefciency measure of the i T output-input combination yT j ; xj for observation j at time T, relative to technology P from period i, measured by the reciprocal of Shephards (1970) output distance function T i i T T i is given by uijT u i yT j ; xj sup {u ju yj ; xj [ P }. Thus, the Malmquist productivity index to compare the base period 0 vwith the subsequent period 1 for decision-making unit (DMU) j is shown as follows: M 01 j ;
0 0 u0 jy ;x 1 1 u0 jy ;x

Effects of nancial reform on productivity 873

A value of the Malmquist index greater than 1 indicates productivity progress relative to the base period. For the convenience of interpretation, we follow Banker et al. (2005) and use a logarithmic transformation of both sides of equation (1). This transformed measure has the natural interpretation of a percentage change in productivity and is expressed as follows:
0 0 0 1 1 Productivity change for bank j ; lnu0 j y ; x 2 lnuj y ; x

To further explore the analysis of the factors behind the productivity change in the banking sectors, we again follow Banker et al. (2005) and rst describe how productivity change is decomposed into two components. The productivity change for a bank j can be diagnosed into two components by adding and subtracting 1 1 lnu1 j y ; x in equation (2) and rearranging terms to yield:

IMDS 108,7

Productivity change PC ; ln

! 1 1 u1 j y ;x
1 1 u0 j y ;x

ln

0 0 u0 j y ;x 1 1 u1 j y ;x

! 3

; technical change TC relative efficiency change EC

874

Estimation models Malmquist productivity models. DEA has been proven to be an effective tool for evaluating the relative efciency of peer decision making units (DMUs) when multiple performance measures are present (Chang et al., 2004). We apply DEA to estimate re et al., 1994; technical change, relative efciency change, and productivity change (Fa Banker et al., 2005; Zelenyuk, 2006) and exhibit the following equation: _0 0 0 u jy ;x ; PC ln 0 _ 1 1 u jy ;x _1 1 1 u jy ;x TC ln 0 ; _ 1 1 u jy ;x _0 u j y 0; x 0 EC ln 1 _ u j y 1; x 1 4

We use the Banker, Charnes, and Cooper (BCC) (Banker et al. (1984)) model to estimate 1 0 1 0 0 1 1 1 u0 j y ; x ; u j y ; x ; u j y ; x . The models are shown below: 9 8  X N N N X X > > _  = < 0 0 0 o 0 0 0 0 _0 0 0 _ lk yk $ u yj ; lk xk # xj ; lk 1; lk $ 0;k 1;:::; N u j y ; x arg max u  k1 k1 > > ; : k1 5 9 8  X N N N X X > > _  = < 1 1 1 1 1 1 1 1 _1 1 1 _ lk yk $ u yj ; l k xk # xj ; lk 1; lk $ 0;k 1;:::; N u j y ; x arg max u  k1 k 1 > > ; : k1 6 9 8  X N N N X X > > _  = < 0 1 0 1 0 _0 1 1 _ l0 lo l0 k yk $ u yj ; k xk # xj ; k 1; lk $ 0;k 1;:::; N u j y ; x arg max u  k 1 k1 > > ; : k1 7 Regression model. Following Banker et al. (2005), we investigate cross-sectional variations in productivity change, technical change, and relative efciency change during the pre-, FFR, and post-periods (2001-2004). Since the changes in the nonperforming loan and capital adequacy ratios are posited to explain the various change measures, we regress each of the three change measures on change in the nonperforming loan ratio (DNPL) and capital adequacy ratio (DCA) between 2001 and 2004. The banking sector is a high-information technology intensive industry (Hwang et al., 2004). Berger (2003); Carter and McNulty (2005); Swierczek et al. (2005); and ONeill and Penm (2007) explore the economic impacts from the information technology

to nancial industry in terms of productivity, prot capability, cost or revenue. Therefore, we use the percentage in the number of ATM growth change (DATM) to proxy for information technology growth (Dos Santos and Peffers, 1998). Finally, prior studies in banking efciency observe that bank operating efciency was affected by its ownership type and size (Altunbas et al., 2000; Williams and Nguyen, 2005; Das and Ghosh, 2006; Iannotta et al., 2007; Cheng, 2007). Therefore, we also include a dummy variable (OWN) for private banks and the natural logarithm of total asset (lnTA) to proxy for bank size. Specically, we specify and estimate the following model: Change measure b0 b1 DNPL% b2 DCA% b3 DATM b4 OWN b5 lnTA 1 8 where change equals the productivity change, technical change, and relative efciency change. Since the three regressions in equation (8) have the identical set of explanatory variables, we can estimate the regression estimators using ordinary least squares (OLS) (Greene, 2000). Selection of input and output variables Identifying appropriate inputs and outputs is crucial for the assessment of operating efciency. Prior banking efciency studies have employed two different approaches in selecting inputs and outputs: the production approach and the intermediation approach. The production approach emphasizes operational activity and primarily views banks as providers of services to customers. Under this approach, the inputs usually include physical variables such as labor, materials, space, information systems, and branches. The output represents the services provided to customers and are best measured by the number and type of transactions, documents processed or specialized services provided over a given time period (Das and Ghosh, 2006). In contrast, the intermediation approach primarily views banks as nancial intermediaries between savers and investors that purchase inputs to generate earning assets (Sealy and Lindley, 1977). Under this approach, both operating and interest expenses are considered as inputs, whereas loans and other major assets are counted as outputs (Isik and Hassan, 2003; Kao and Liu, 2004; Das and Ghosh, 2006; Park and Weber, 2006; Li et al., 2007). The intermediation approach is preferable since it normally includes the interest expense, a large proportion of any banks total costs (Berger and Humphrey, 1992; Elyasiani and Mehdian, 1995). According to the Taiwan Banking Law, the role of commercial banks in Taiwan is primarily to mediate funds between depositors and borrowers whose main business is to borrow funds from depositors to lend to others (Kao and Liu, 2004). Given this and the above mentioned advantages of the intermediation approach, we adopt the intermediation approach in this study. Specically, we follow Yeh (1996) and Kao and Liu (2004) to choose three outputs and three inputs for our estimation of banking efciency. The three inputs we consider are interest expenses, non-interest expenses, and total deposits while the three outputs we choose are interest revenue, non-interest revenue, and total loans. Interest expenses include expenses for deposits and other borrowed money. Non-interest expenses include service charges and commissions, expenses of general management affairs, salaries, and other expenses (including health insurance and securities portfolios). Total loans consist of short-term and medium-term loans. Total deposits are composed of checking accounts and time deposits.

Effects of nancial reform on productivity 875

IMDS 108,7

The interest revenue includes interest on loans, income from government bonds and corporate bonds. Non-interest revenue includes services charges on loans and transactions, income from renting and duciary activities, commissions, and other operating income (including health insurance and securities portfolios). Total loans consist of short-term and medium-term loans.

876
Results and discussions Descriptive statistics Table I provides descriptive statistics for bank inputs, outputs, and the FFR policy variables for the four year period from 2001 to 2004. Owing to the lower market interest rate, interest revenue and interest expense decreased 44.5 percent and 65.4 percent, respectively, from 2001 to 2004. The monetary values are in New Taiwan (NT) dollars, where $1 US dollar is approximately equal to $33 NT dollars. In 2002, the rst year of the FFR, the mean (median) of the non-interest operating expenses (excluding the interest expenses) dramatically increased to $13,146.2 ($7,643.6) million NT dollars, which was 28.4 percent higher than in 2001 and 24.2 percent higher than in 2003. However, right after FFR in 2004, the amount dropped dramatically to $9,652 million NT dollars, compared to the highest point in 2002, a 26.6 percent difference. Interestingly, the non-interest revenue in 2002 was 23.7 percent lower than in 2001 and 23.9 percent lower than in 2003. Similarly, after FFR in 2004, it rose 56.5 percent from 2003. The average loan ratio (total loan/total deposit) was 83.1 percent in 2001 but dropped to 79.8 percent in 2003. Regarding the average ratio of the total loans and total deposits, we found 83.1 percent; 80.4 percent; 79.8 percent; and 81 percent for 2001; 2002; 2003; and 2004, respectively. Only in the FFR period, banks tightened their credit policy and decreased their loans to comply with the government accord. In both the pre- and post-FFR periods, the average loan ratios were higher. In Table I Panel B, the mean (median) of the nonperforming loan ratio was 8.37 percent (6.08 percent); 7.16 percent (4.38 percent); 5.58 percent (3.76 percent); and 3.93 percent (2.61 percent) for 2001; 2002; 2003; and 2004, respectively. Therefore, it appears that the nonperforming loan ratios of most banks were in accordance with the government regulation in 2002. The mean of the nonperforming loan ratio was 8.37 percent in 2001, deceased by 4.44 percent to 3.93 percent in 2004, an improvement of 53 percent compared to 2001. The mean (median) of the capital adequacy ratio from 2001 to 2004 is 10.34 percent (10.37 percent) which is higher than the minimum 8 percent ofcial requirement. The means (medians) for each year are 10.6 percent (10.49 percent); 10.26 percent (10.33 percent); 10 percent (10.12 percent); and 10.49 percent (10.68 percent), respectively, for 2001 to 2004. These ndings suggest that the banks may have adopted the 8 percent capital adequacy requirement of the Basel accord prior to the FFR period. Dos Santos and Peffers (1998) used the percentage in the number of ATM growth change (DATM) as the proxy of information technology growth. The growth rates of ATMs for 2001-2002, 2002-2003, and 2003-2004 are 15.04 percent, 26.5 percent and 17.5 percent, respectively. The percentages of ATMs changes grew 57.18 percent on average from 2001 to 2004. These higher growth rates of ATMs are consistent with government incentives.

Variables

Year

Mean

SD

25 percent

Median

75 percent

Panel A: Outputs and Inputs Output items Interest revenue ( y1)

Non-interest revenue ( y2)

Total Loans ( y3)

2001 2002 2003 2004 2001 2002 2003 2004 2001 2002 2003 2004

24,135.3 17,980.5 14,014.2 13,396.5 4,136.2 3,155.5 4,146.4 4,936.9 29,4521.9 280,911.7 297,485.3 305,879.9

24,712.7 17,601.1 12,365.3 11,198.2 4,965.5 3,947.7 4,205.2 5,297.1 317,255.4 291,691.7 298,156.9 305,925.8

9,598 7,510.7 6,403.1 5,964.2 945.5 567.7 905.7 1,046.9 11,2151 98,958.0 107,304.4 106,035.4

13,404 10,323.9 8,413.7 8,876.2 2,423.5 1,490.5 2,615.9 3,134.0 149,958.5 142,193.2 153,541.7 168,977.0

29,988 25,780 20,937.2 19,980.5 4,925 3,746.7 5,842.2 6,032.9 402,202.5 362,947.5 384,590.1 411,412.0

Input items Interest expense (x1)

Non-interest expense (x2)

Total Deposits (x3)

2001 2002 2003 2004 2001 2002 2003 2004 2001 2002 2003 2004

16,568 9,532.7 6,225.3 5,737.6 10,234.5 13,146.2 10,581.2 9,652.0 354,398.3 349,210.7 372,557.4 377,689.8

17,715.8 10,722.6 6,991.8 6,604.6 10,028.4 13,736 10,345.9 7,861.6 396,948.8 392,522.3 410,292.7 401,542.9

7,075.3 3,895 2,473 2,199.2 3,523.5 4,611.9 4,393 5,095.7 133,536.3 123,820.8 130,199.8 140,110.1

9,264 5,079.2 3,348.5 2,923.5 5,291.5 7,643.6 6,735.5 7,192.7 201,653 191,678.4 198,199.3 191,945.6

20,402.3 11,121.9 7,624.5 7,735.0 13,318.8 15,787.9 14,845.7 12,862.5 454,390.3 418,739.5 434,068.7 438,394.8 (continued )

Effects of nancial reform on productivity 877

Table I. Descriptive statistics on outputs, inputs, and the rst nancial restructuring variables (N 42)

878

IMDS 108,7

Variables

Panel B: FFR and control variables Non-performing ratio (percent)

DNPL (percent) Capital adequacy ratio (percent)

DCA (percent) ATM

DATM (percent) TA

Notes: Interest revenue: interest revenue of the bank. Non-interest revenue: comprises transaction fee and commission revenue, bond transaction revenue, and other operating revenue. Total loans: total loans at year end. Interest expense: interest expense of bank per year. Non-interest expense: includes the expenditures of transaction and commission, personnel, and other operating related expense. Total deposits: total deposits at year end. All dollar amounts express in million New Taiwan Dollars deated to 2001; NPL: nonperforming loan, total due loans/ total loans. CA: capital adequacy ratio, amount of a banks capital expressed as a percentage of its risk weighted credit exposures. DCA (percent): capital adequacy ratio of 2004-capital adequacy ratio of 2001. DNPL (percent): nonperforming loan ratio of 2004 nonperforming loan ratio of 2001. ATM: numbers of ATM; DATM (percent): (2004ATM-2001ATM)/(2001ATM) *100. TA: total assets measured in New Taiwan Dollars deated to 2001

Table I. Year 2001 2002 2003 2004 2001-2004 2001 2002 2003 2004 2001-2004 2001 2002 2003 2004 2001-2004 2001 2002 2003 2004 8.37 7.16 5.58 3.93 2 4.44 10.60 10.26 10.00 10.49 2 0.11 227.50 261.71 331.10 389.07 57.18 478,989.6 471,027.4 508,595.9 517,575.8 6.63 6.46 5.43 4.15 4.80 2.28 2.78 2.22 2.29 2.23 196.60 235.31 432.00 538.39 117.52 529,599.7 514,229.7 543,559.1 532,892.5 3.91 3.22 2.29 1.65 2 5.85 9.28 8.99 8.96 9.58 2 1.65 87.00 96.00 107.00 108.25 2.73 173,287.8 164,572.3 164,269.9 172,784.3 6.08 4.38 3.76 2.61 2 3.79 10.49 10.33 10.12 10.68 0.26 127.00 150.00 169.00 166.5 14.36 244,350.5 234,314.9 250,075.5 268,605.7 Mean SD 25 percent Median 75 percent 9.85 8.48 7.03 4.42 2 1.96 11.62 12.09 11.09 11.62 1.18 301.00 372.00 448.00 426 44.80 661,846.5 596,628.3 696,377.3 658,025.2

Productivity change analysis We rst use the DEA to estimate technical change, relative efciency change, and productivity change from 2001 to 2004 using observed data on input-output vectors. We present the descriptive statistics and the results of the tests of the hypotheses for productivity change in Table II. As reported in Table II, the mean (median) of productivity change improved 117.39 percent (119.56 percent) for 2001-2004. We nd that for 2001-2002, 2002-2003, and 2003-2004, the means (medians) of productivity change improved 49.81 percent (49.22 percent); 50.52 percent (47.71 percent); and 21.91 percent (22.31 percent), respectively. Technical change increased 57.86 percent (57.26 percent); 45.6 percent (44.81 percent); 16.67 percent (15.6 percent) for 2001-2002; 2002-2003; and 2003-2004, respectively. For 2000-2001, the means of relative efciency change dramatically dropped 8.05 percent, but for 2002-2003 and 2003-2004 improved 4.92 percent and 5.24 percent. The aggregate efciency improved signicantly by 2.11 percent for 2001-2004. Overall, the mean (median) total productivity grew 117.39 percent (119.56 percent) from 2001 to 2004 and was signicantly greater than zero based on both nonparametric and parametric tests. We nd that the mean (median) technical change in commercial banks from 2001 to 2004 is 115.28 percent (119.5 percent) and was signicantly greater than zero based on both nonparametric and parametric tests. The mean relative efciency change grew 2.11 percent from 2001 to 2004 and was signicantly different from zero. These results support hypotheses H1A, H1B, and H1C. Impact of the FFR on banking productivity In Table III, we present the results of estimating the OLS model specied in equation (8). Whites (1980) test indicated that the assumption of homoskedastic residuals was
p-value for t-test for mean 0a 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.01 0.00 0.03 p-value for sign rank test for median 0 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.04 0.00 0.46

Effects of nancial reform on productivity 879

Variable Productivity change

Pred. Period Signs (from-to) 2001-2002 2002-2003 2003-2004 2001-2004 2001-2002 2002-2003 2003-2004 2001-2004

Mean 0.4981 * * * 0.5052 * * * 0.2191 * * * 1.1739 * * * 0.5786 * * * 0.4560 * * * 0.1667 * * * 1.1528 * * *

Median 0.4922 * * * 0.4771 * * * 0.2231 * * * 1.1956 * * * 0.5726 * * * 0.4481 * * * 0.1560 * * * 1.1950 * * * 2 0.0425 * * * 0.0137 * * 0.0492 * * * 0.00

Technical change

Change in relative efciency

2001-2002 2 0.0805 * * * 2002-2003 0.0492 * * * 2003-2004 0.0524 * * * 2001-2004 0.0211 * *

Notes: aThe p-values are for testing whether productivity or technical change or relative efciency change is signicantly greater than zero. *, * *, * * *Signicant at the 10, 5, and 1 percent levels, respectively, for two-sided hypothesis tests

Table II. Tests of productivity change, technical change, and efciency change between 2001 and 2004 (N 42)

IMDS 108,7

Variables

Pred. Signs

Productivity change

Technical change

Relative efciency change

880

Table III. OLS regression results for the determinants of productivity change, technical change, and relative efciency change in Taiwanese commercial banks ( p-values in parentheses) (N 42)

Productivity change, technical change, and relative efciency change b0 b1DNPL% b2DCA % b3DATM b4DOWN b5ln TA 1 (8) Intercept 1.0706 1.1455 -0.0748 (0.11) (0.09) (0.58) DNPL 2 2 0.0185 * * * 2 0.0147 * * 2 0.0038 * * * (0.01) (0.04) (0.01) DCA 0.0215 0.0140 0.0075 * * (0.14) (0.33) (0.02) DATM 0.0441 0.0410 0.0030 (0.11) (0.14) (0.59) OWN 0.1386 0.1419 2 0.0034 (0.17) (0.16) (0.87) InTA 2 0.0107 2 0.0146 0.0039 (0.82) (0.76) (0.69) Adj R 2 0.2007 0.1598 0.1847 F-statistic 3.06 * * 2.56 * * 2.86 * * (0.02) (0.04) (0.03) Notes: Dependent variables are the bank-specic value of the productivity, technical change and relative efciency change over the period 2001 to 2004. Variable denitions: DNPL (percent): nonperforming loan ratio of 2004- nonperforming loan ratio of 2001. DCA (percent): capital adequacy ratio of 2004-capital adequacy ratio of 2001. DATM (percent): (ATM number of 2004-ATM number of 2001)/ATM number of 2001. OWN: 1 private ownership bank if the bank was owned by the public; 0 state ownership bank if the bank was owned by governance. lnTA: natural logarithm of 2001 total assets. *, * *, * * *Signicant at the 10, 5, and 1 percent levels, respectively, for two-sided hypothesis tests

not violated. From Table III, we observe that the coefcients of DNPL are signicantly negative (2 0.0185; 2 0.0147; 2 0.0038). The results indicate that the lower nonperforming loan change led to higher productivity as well as better technical change and efciency change. The purpose of FFR is to improve banking loan quality and to modify the nancial structure. Once the nonperforming loan ratio is below 5 percent, the related ofcial loan application process and routine verications can be simplied and nancial innovation and lower nonperforming loans are encouraged. In addition, if the nonperforming loan ratio is under 2.5 percent, combo branch ofce applications along with the permits to open either domestic or foreign branch ofces are doubled. These benets enable bank organizational innovation, higher market shares, increased information technology investment, and streamlined business transactions. These consequences, in turn, contribute to banking technical progress and efciency enhancement. These results support Hypotheses H2A, H2B, and H2C. As reported in Table III, the coefcients of DCA are positive (0.0215; 0.0140; 0.0075). Only the relative efciency change (0.0075) reached statistical signicance. Although one of the requirements of the FFR was a minimum capital adequacy ratio of 8 percent, for the pre-, FFR, and post-periods the mean and median are all above 10 percent (Table I, Panel B). In addition, the change scope for the study period is trivial. Therefore, our study reveals that only the higher banking capital adequacy ratio change signicantly leads to better relative efciency change but technical change and productivity change do not.

A voluminous literature examines the relationship between industrial ownership and performance. Principal-agent theory may explain differences in the performance of rms with different ownership. In Asia, state ownership of commercial banks was used to assist national economic development policies (Williams and Nguyen, 2005). The government may see banks as a source of scal revenue which could induce increased risk taking and a poor allocation of assets (Levine, 2004). This could be exacerbated by weak supervisory frameworks which allow well-connected borrowers to become even more highly leveraged (Claessens et al., 2000). Thus, state-ownership may be inefcient. Private ownership is expected to promote efciency by reducing agency problems and contributing to the shareholders exercising due diligence and monitoring managerial performance (Williams and Nguyen, 2005). We add the ownership (OWN) variable as control variable to testify this notion. We found the productivity, technical change, and relative efciency change of private banks all yield positive, but not statistically signicant relationships. Sensitivity analyses To evaluate the robustness of our empirical results, we conducted the following additional analyses. First, we check our residuals for heteroscedasticity using Whites (1980) test; we do not nd evidence of heteroscedasticity. Second, we use Belsley et al. (1980) diagnostics for collinearity and we do not nd evidence of collinearity between contextual variables in our regression models. Finally, we follow Das and Ghosh (2006) and Park and Weber (2006) and consider only two inputs and two outputs by dropping total deposits and total loans. The results of Table IV are similar to those discussed for the three inputs and three outputs specication case. Therefore, we conclude that our results are robust. Conclusion Employing a DEA-type Malmquist Productivity Change Index approach, we investigated the impact of the FFR on the productivity, technical and efciency changes of Taiwanese commercial banks between 2001 and 2004. We hypothesized that bank performance measured by various efciency and productivity scores would rise during the more liberal and competitive environment. Using data from 42 commercial banks in Taiwan, we nd that commercial banks on average experienced a 117.39 percent increase in productivity growth, of which is 2.11 percent is due to efciency change and 115.28 percent to technical progress over the four year period. Furthermore, during the four year period, a 1 percent reduction in the nonperforming loan ratio resulted in 1.85 percent growth in productivity; and a 1 percent increase in the capital adequacy ratio led to 2.15 percent growth in productivity. Banks experienced a substantial improvement in productivity, technical progress, and efciency growth during 2001 and 2004 periods. We conclude that after the FFR, the productivity change, technical change, and efciency change all improve. The lower nonperforming loan ratio required by the FFR contributes to improved performance in terms of productivity, technical change, and relative efciency change. The average productivity growth of 117.39 percent has resulted in better nancial performance of protability. Based on the ofcial Financial Supervisory Commission, Executive Yuan, Taiwan, the average ROA were 0.27 percent; 2 0.48 percent; 0.22 percent; and 0.63 percent and the average ROE were 3.6 percent; 2 6.93 percent;

Effects of nancial reform on productivity 881

882

IMDS 108,7

Panel A: Tests of productivity change, technical change, and efciency change between 2001 and 2004 (N 42) Variable Prediction Period (from-to) Mean p-value for t-test for mean 0 a Median p-value for sign rank test for median 0 Productivity change 2001-2002 0.3351 * * * 0.00 0.2187 * * * 0.00 2002-2003 0.3491 * * * 0.00 0.3445 * * * 0.00 2003-2004 0.2311 * * * 0.00 0.2002 * * * 0.00 2001-2004 0.8578 * * * 0.00 0.7644 * * * 0.00 Technical change 2001-2002 0.4760 * * * 0.00 0.4932 * * * 0.00 2002-2003 0.2538 * * * 0.00 0.2037 * * * 0.00 2003-2004 0.1840 * * * 0.00 0.1519 * * * 0.00 2001-2004 0.8564 * * * 0.00 0.8039 * * * 0.00 Change in relative efciency 2001-2002 2 0.1409 * * * 0.00 2 0.0867 * * * 0.05 2002-2003 0.0953 * * * 0.01 0.0632 * * * 0.11 2003-2004 0.0471 * * * 0.01 0.0529 * * * 0.01 2001-2004 0.0014 0.32 2 0.0076 0.19 Panel B: OLS regression results for the determinants of productivity change, technical change, and relative efciency change in Taiwanese commercial banks ( p-values in parentheses) (N 42) Productivity change; technical change; and relative efficiency change b0 b1 DNPL% b2 DCA% b3 DATM b4 DOWN b5 ln TA 1 Variables Pred. Signs Productivity change Technical change Relative efciency change Intercept 0.0865 0.8884 2 0.8019 (0.93) (0.38) (0.04) * * * DNPL 2 2 0.0248 2 0.0204 2 0.0044 (0.03) (0.07) (0.29) 2 0.0144 DCA 0.0261 0.0406 * (0.26) (0.07) (0.11) 0.1036 * * * 0.0041 DATM 0.1077 * * (0.02) (0.01) (0.80) * * * * * * OWN 0.5208 0.4018 0.1191 * * (0.00) (0.01) (0.05) InTA 0.0117 2 0.0377 0.049 (0.88) (0.60) (0.08) 2 Adj R 0.4034 0.3853 0.0637 F-statistic 6.55 * * * 6.14 * * * 1.56 (0.00) (0.00) (0.19)

Notes: aThe p-values are for testing whether productivity or technical change or relative efciency change is signicantly greater than zero. Dependent variables are the bank-specic value of the productivity, technical change and relative efciency change over the period 2001 to 2004. Variable denitions: DNPL (percent): nonperforming loan ratio of 2004nonperforming loan ratio of 2001. DCA (percent): capital adequacy ratio of 2004-capital adequacy ratio of 2001. DATM (percent): (ATM number of 2004-ATM number of 2001)/ATM number of 2001. OWN: 1 private ownership bank if the bank was owned by the public; 0 state ownership bank if the bank was owned by governance. lnTA: natural logarithm of 2001 total assets. *, * *, * * *Signicant at the 10, 5, and 1 percent levels, respectively, for two-sided hypothesis tests

Table IV. Sensitivity analysis results (two inputs and two outputs)

3.52 percent; and 10.3 percent for overall local commercial banks from 2001 to 2004. The results of the current study have implications for the design of public policy by providing evidence to policymakers of the FFR impacts on banking productivity change. Furthermore, given an increasingly competitive environment where inferior productivity institutions are less likely to survive. It is essential for regulators and managers to be knowledgeable about technical progress and efcient performance in the banking industry and critical factors (such as nonperforming loans and capital adequacy) that may exacerbate or mitigate them. Also, the results reported here suggest that lower nonperforming loans correlate substantial high technical progress and slightly relative efcient change. The higher capital adequacy ratio change signicantly leads only to better relative efciency change. Thus, future regulations should target more on the prevention and reduction of nonperforming loans in an effort to improve banking productivity. Our study provides important empirical evidence for the implementation of nancial restructuring in emerging markets and suggests that both the nonperforming loan and capital adequacy ratios are critical indicators of bank productivity. The need for state-of-the-art technology investment in banking has intensied with the increase in competition from the globalization and liberalization of the nancial markets. To sustain competitive advantage, banks must consider strategic tactics to attract clients, including improving customer relations management, offering a wider variety of nancial services, and providing additional value-added services with enhanced convenience and quality. There are several suggestions for future research. First, later study may examine the longer-term implications of restructuring beyond the one-year post-reform period considered in the current study. Second, while we chose to study the productivity change effects of FFR, future research may consider the effects of corporate government or knowledge management issues. Third, with respect to nancial market development, future study may conduct either international (OECD) or regional (APEC) banking sectors productivity change analysis. The benchmarking can serve for policy references and banks positioning. The surging trend of merger and acquisition in banking sector would lead to another era, respectively.
References Ahmed, A.S., Takeda, C. and Thomas, S. (1999), Bank loan loss provisions: a reexamination of capital management, earning management and signaling effects, Journal of Accounting Economics, Vol. 28 No. 1, pp. 1-25. Altunbas, Y., Liu, M., Molyneux, P. and Seth, R. (2000), Efciency and risk in Japanese banking, Journal of Banking & Finance, Vol. 24 No. 10, pp. 1602-28. Angelini, P. and Cetorelli, N. (2003), The effects of regulatory reform on competition in the banking industry, Journal of Money, Credit, and Banking, Vol. 35 No. 5, pp. 663-84. Banker, R.D., Chang, H. and Natarajan, R. (2005), Productivity change, technical progress, and relative efciency change in the public accounting industry, Management Science, Vol. 51 No. 2, pp. 291-304. Banker, R.D., Charnes, A. and Cooper, W.W. (1984), Models for the estimation of technical and scale inefciencies in data envelopment analysis, Management Science, Vol. 30 No. 9, pp. 1078-92.

Effects of nancial reform on productivity 883

IMDS 108,7

884

Barth, J.R., Caprio, G. Jr and Levine, R. (2004), Bank regulation and supervision: what works best?, Journal of Financial Intermediation, Vol. 13, pp. 205-48. Belsley, D.A., Kuh, E. and Welsch, R.E. (1980), Regression Diagnostics, Wiley, New York, NY. Berg, S.A., Forsund, F.R. and Jansen, E.S. (1992), Malmquist indices of productivity growth during the deregulation of Norwegian banking, 1980-89, Scandinavian Journal of Economics, Vol. 94, pp. 211-28. Berger, A.N. (2003), The economic effects of technological progress: evidence from the banking industry, Journal of Money, Credit, and Banking, Vol. 35 No. 2, pp. 141-77. Berger, A.N. and DeYoung, R. (1997), Problem loans and cost efciency in commercial banks, Journal of Banking & Finance, Vol. 21 No. 6, pp. 849-70. Berger, A.N. and Humphrey, D.B. (1992), Measurement and efciency issues in commercial banking, Output Measurement in the Service Sectors 56, University of Chicago Press. National Bureau of Economic Research, Chicago, IL, pp. 245-79. Berger, A.N. and Mester, L.J. (2003), Explaining the dramatic changes in performance of US banks: technological change, deregulation, and dynamic changes in competition, Journal of Financial Intermediation, Vol. 12, pp. 57-95. Blum, J. and Hellwig, M. (1995), The macroeconomic implications of capital adequacy requirements for banks, European Economic Review, Vol. 39, pp. 739-49. Carter, D.A. and McNulty, J.E. (2005), Deregulation, technological change, and the business-lending performance of large and small banks, Journal of Banking & Finance, Vol. 29 No. 5, pp. 1113-30. Casu, B., Girardone, C. and Molyneux, P. (2004), Productivity change in European banking: a comparison of parametric and non-parametric approaches, Journal of Banking & Finance, Vol. 28, pp. 2521-40. Chandra, A. and He, W. (2008), Government involvement and nancial service intensity: a comparative study of three business incubators in China, International Journal of Innovation and Learning, Vol. 5 No. 3, pp. 266-82. Chang, H., Cheng, M. and Das, S. (2004), Hospital ownership and operating efciency: evidence from Taiwan, European Journal of Operational Research, Vol. 159 No. 2, pp. 513-27. Cheng, S. (2007), A study on the factors affecting stock liquidity, International Journal of Services and Standards, Vol. 3 No. 4, pp. 453-75. Claessens, S., Djankov, S. and Lang, L.H.P. (2000), The separation of ownership and control in East Asian corporations, Journal of Financial Economics, Vol. 58 Nos 1/2, pp. 81-112. Cook, W.D., Seiford, L.M. and Zhu, J. (2004), Models for performance benchmarking: measuring the effect of e-business activities on banking performance, Omega, Vol. 32 No. 4, pp. 313-22. Das, A. (2002), Risk and productivity change of public sector banks, Economic and Political Weekly, Vol. 37, pp. 437-47. Das, A. and Ghosh, S. (2006), Financial deregulation and efciency: an empirical analysis of Indian banks during the post reform period, Review of Financial Economics, Vol. 15 No. 3, pp. 193-221. Dos Santos, B.L. and Peffers, K. (1998), Competitor and vendor inuence on the adoption of innovative applications in electronic commerce, Information Management, Vol. 34 No. 3, pp. 175-84. Elyasiani, E. and Mehdian, S. (1995), The comparative efciency performance of small and large US commercial banks in the pre- and post-deregulation eras, Applied Economics, Vol. 27 No. 11, pp. 1069-79.

 re, R., Grosskopf, S., Norris, M. and Zhang, Z. (1994), Productivity growth, technical progress, Fa and efciency change in industrialized countries, The American Economic Review, Vol. 84 No. 5, pp. 66-83. Fukuyama, H. and Weber, W.L. (2002), Estimating output allocative efciency and productivity change: application to Japanese banks, European Journal of Operational Research, Vol. 137 No. 1, pp. 177-90. Greene, W. (2000), Econometric Analysis, 4th ed., Prentice-Hall, Englewood Cliffs, NJ. Halkos, G.E. and Salamouris, D.S. (2004), Efciency measurement of the Greek commercial banks with the use of nancial ratios: a data envelopment analysis approach, Management Accounting Research, Vol. 15 No. 2, pp. 201-24. Hammes, W. and Shapiro, M. (2001), The implications of the new capital adequacy rules for portfolio management of credit assets, Journal of Banking & Finance, Vol. 25 No. 1, pp. 97-114. Hsu, R., Lawson, D. and Liang, T. (2007), Factors affecting knowledge management adoption of Taiwan small and medium-sized enterprises, International Journal of Management and Enterprise Development, Vol. 4 No. 1, pp. 30-51. Hwang, H., Ku, C., Yen, D.C. and Cheng, C. (2004), Critical factors inuencing the adoption of data warehouse technology: a study of the banking industry in Taiwan, Decision Support System, Vol. 37 No. 1, pp. 1-21. Iannotta, G., Nocera, G. and Sironi, A. (2007), Ownership structure, risk and performance in the European banking industry, Journal of Banking & Finance, Vol. 31 No. 7, pp. 2127-49. Isik, I. and Hassan, M.K. (2003), Financial deregulation and total factor productivity change: an empirical study of Turkish commercial banks, Journal of Banking & Finance, Vol. 27 No. 8, pp. 1455-85. Kao, C. and Liu, S. (2004), Predicting bank performance with nancial forecasts: a case of Taiwan commercial banks, Journal of Banking & Finance, Vol. 28 No. 10, pp. 2353-68. Konishi, M. and Yasuda, Y. (2004), Factors affecting bank risk taking: evidence from Japan, Journal of Banking & Finance, Vol. 28 No. 1, pp. 215-32. Kumbhakar, S. and Sarkar, S. (2003), Deregulation, ownership, and productivity growth in the banking industry: evidence from India, Journal of Money, Credit, and Banking, Vol. 35 No. 3, pp. 403-24. Kuo, F., Tseng, F. and Liou, D. (2007), Understanding the effects of relationships on the intention of a rm to adopt e-banking, International Journal of Electronic Finance, Vol. 1 No. 4, pp. 484-501. Kuo, H. (2004), Strategic change for the banking industry under nancial deregulation: implications from Taiwan evidence, International Journal of Technology Management, Vol. 27 No. 4, pp. 331-42. Levine, R. (2004), The corporate governance of banks: a concise discussion of concepts and evidence, working paper, World Bank Policy Research, 3404, September. Li, B., Nguyen, V.T. and Lin, B. (2007), A quantitative analysis on the impacts of bank loans for small enterprises, International Journal of Management and Enterprise Development, Vol. 4 No. 2, pp. 119-27. Malmquist, S. (1953), Index numbers and indifference surfaces, Trabajos de Estadistica, Vol. 4, pp. 209-42. Maniadakis, N. and Thanassoulis, E. (2004), A cost Malmquist productivity index, European Journal of Operational Research, Vol. 154 No. 2, pp. 396-409.

Effects of nancial reform on productivity 885

IMDS 108,7

886

Mukherjee, K., Ray, S.C. and Miller, S.M. (2001), Productivity growth in large US commercial banks: the initial deregulation experience, Journal of Banking & Finance, Vol. 25 No. 5, pp. 913-39. Niswander, F. and Swanson, E.P. (2000), Loan, security, and dividend choices by individual (unconsolidated) public and private commercial banks, Journal of Accounting & Public Policy, Vol. 19 No. 3, pp. 201-35. ONeill, T.J. and Penm, J. (2007), A new approach to testing credit rating of nancial debt issuers, International Journal of Services and Standards, Vol. 3 No. 4, pp. 390-401. Park, K.H. and Weber, W.L. (2006), A note of efciency and productivity growth in the Korean banking industry, 1992-2002, Journal of Banking & Finance, Vol. 30 No. 8, pp. 2371-86. Reddy, A.A. (2005), Banking sector deregulation and productivity change decomposition of Indian banks, Finance India, Vol. 19 No. 3, pp. 983-1001. Rime, B. (2001), Capital requirements and bank behavior: empirical evidence for Switzerland, Journal of Banking & Finance, Vol. 25 No. 4, pp. 789-805. Sealy, C. and Lindley, J.T. (1977), Inputs, outputs and a theory of production and cost at depository nancial institution, Journal of Finance, Vol. 32, pp. 1251-66. Shephard, R.W. (1970), Theory of Cost and Production Functions, Princeton University Press, Princeton, NJ. Shih, K. (2008), Is e-banking a competitive weapon? A causal analysis, International Journal of Electronic Finance, Vol. 2 No. 2, pp. 180-96. Swierczek, F.W., Shrestha, P.K. and Bechter, C. (2005), Information technology, productivity and protability in Asia-Pacic banks, Journal of Global Information Technology Management, Vol. 8, pp. 6-27. Tortosa-Ausina, E., Grifell-Tatje, E., Armero, C. and Conesa, D. (2008), Sensitivity analysis of efciency and Malmquist productivity indices: an application to Spanish savings banks, European Journal of Operational Research, Vol. 184, pp. 1062-84. White, H. (1980), A heteroskedasticity-consistent covariance matrix estimator and a direct test for heteroscedasticity, Econometrica, Vol. 4, pp. 817-38. Williams, J. and Nguyen, N. (2005), Financial liberalization, crisis, and restructuring: a comparative study of bank performance and bank governance in South East Asia, Journal of Banking & Finance, Vol. 29 Nos 8/9, pp. 2119-54. Yeh, Q.J. (1996), The application of data envelopment analysis in conjunction with nancial ratios for bank performance evaluation, Journal of the Operational Research Society, Vol. 47, pp. 980-8. Zelenyuk, V. (2006), Aggregation of Malmquist productivity indexes, European Journal of Operational Research, Vol. 174 Nos 5/6, pp. 1076-86. Zhou, H., Koong, K.S. and Xiong, Y. (2007), Accounting standards and quality of earnings information: evidence from an emerging economy, International Journal of Electronic Finance, Vol. 1 No. 3, pp. 355-72. Corresponding author Li-Hua Huang can be contacted at: dbacpa@webmail.ntcb.edu.tw

To purchase reprints of this article please e-mail: reprints@emeraldinsight.com Or visit our web site for further details: www.emeraldinsight.com/reprints